National Network (LSE:NG.) shares plunged in May after the energy infrastructure company announced it would launch a £7 billion rights issue to fund a £60 billion spending programme over the next five years.
But how has the stock performed over the long term? Well, 15 years ago, National Grid shares were trading at around 501 pence per share. That means the stock has risen 78% over that period, which equates to growth of just 5.2% per year.
Given that the company has paid a dividend in most of those years – last year’s yield was around 6.3% – this should be one of the better yields on the market. FTSE100.
So if I had invested £1,000 in National Grid shares 15 years ago, I would have around £1,780 today plus dividends. That means I would have more than doubled my money.
However, past performance is not an indicator of future performance. The caveat is that a company’s sentiment and track record of beating earnings expectations are very important.
So is National Grid a good investment today?
What do analysts think?
I often find price targets a good starting point when assessing how much a stock should be worth. The consensus price target represents the average fair value issued by analysts and major brokerages.
The average price target for National Grid shares is £11.09, which represents a 23.4% premium to the current share price, which is very positive.
The problem, however, is that some of these price targets were set before the rights issue was announced.
That price target has since fallen, but could fall further as analysts review their positions on the stock.
My opinion
The stock currently trades at 12.9 times forward earnings. And analysts who closely follow the stock expect earnings to improve in the medium term. National Grid trades at 12 times earnings for 2025 and 11 times earnings for 2026.
In addition, the company is expected to grow its asset base at a compound annual growth rate (CAGR) of 10% between 2024 and 2029. This reflects the increasing demand for electricity in the UK, as the country is the number one location for power-guzzling data centres in Europe.
While the earnings performance and macro trends are positive, there are certainly reasons for concern. Firstly, the company is already heavily indebted and the £60 billion investment programme will no doubt cause concern for some investors.
For comparison, that £60 billion is more than double what the energy infrastructure giant has spent over the past five years. Management will of course argue that this is necessary given the evolution of energy demand.
Moreover, a high debt burden becomes even more burdensome when interest rates are as high as they are today. The capital increase perhaps reflects the fact that borrowing money is very expensive today compared to the last two decades.
The conclusion
Personally, I would rather just let things run their course for the next few months and then reassess the situation.
It should also be noted that the dividend yield will decrease after the completion of the rights issue. New investors will only be allocated the new shares if they participated in the rights issue.
The expected yield is not 6.5% as some analysts suggest. The total dividend will be reduced by about 15%.
The post If I Invested £1,000 in National Grid Shares 15 Years Ago, Here’s What I’d Have Today appeared first on The Motley Fool UK.
Further reading
James Fox does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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